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Portfolio > Economy & Markets

Correction, Bear Market, or Worse?

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Given the current economic climate and the decline in risky assets, I feel compelled to continue the conversation we began some three weeks ago. If you recall, I voiced my concerns over the excessive debt burden of the European nations, the rise in socialism here at home, and, in short, how this path is unsustainable. I wrote that if the tiny nation of Greece caused such panic in the global financial markets, what would happen if a larger economy, say Spain or Italy, was to falter?

I’ve long held the belief that if socialism ever grew too large, government would be unable to collect enough tax to support it, and the entire house of cards would come crashing down. It’s essential to understand how government competes with the private sector. As government grows it requires a greater amount of revenue to operate. Since there is a finite amount of capital in an economy, the more that government collects, the less there is to buy products and services from the private sector. At this point, economic growth is stifled. Yes, the government can increase the money supply and a multinational company can go global, but slower economic growth may still result.

Oh, and with an increased money supply comes a potential currency devaluation which helps those exporting-multinational companies (Can you say ‘campaign contributions?’).

Today, Europe is fighting the effects of the recent debt crisis and a strong entitlement mentality. Because of its debt woes, Europe is in the process of making severe cuts in government programs, beginning with politicians’ salaries and ending with government programs. According to an astute friend of mine living in Europe, we can expect more unrest like that which we’ve seen in Greece. Clearly, the percentage of the dependent class (in the sense of those receiving government benefits) has reached its tipping point.

How will the financial markets respond? How did they respond with the Greek tragedy? You don’t have to be a market timer, just ask yourself this one simple question, “IF there is more rioting in the streets of one of these troubled nations, would European stocks likely rise, or fall?”

When a storm comes, you close the shutters, buy the appropriate supplies, and hunker down. A few weeks ago, I reduced my client’s exposure to stocks to a range from 6% to 29%. Yes, I may miss one of those ’50 greatest daily increases,’ but in my view, the trend is down. And whenever the trend is down, there are always placebo increases along the way. Since I cannot time these short-term increases, but believe the market is on a downward trend, I remain a bear.

Which animal are you these days? I’d love to hear!

Thanks for reading.


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